British Policies.

As said in the post below, the world is falling in the deepest recession ever due to the banking crisis and the UK economy is not an exception. As seen in the diagram the economy will shrink by 4-5% in 2009 and there are hot discussions about the policies to deal with the negative growth. 



At first let's deal with theory.(It's necessary to say that we assume that economy now is working far below full capacity and the recession is cause not by a shift of SRAS but by the shift of the AD.) 

Monetary policy: Decrease Interest rates/Devaluation of the currency. 

The first measure is likely to encourage people to borrow and discourage them to save therefore stimulate both consumption and investment. Second measure is likely to increase exports and therefore boost the Aggregate Demand. 

Fiscal policy: Decrease taxes/Increase government spending. 

First measure will increase people's disposable income and therefore is likely to increase spending. Second measure is a direct boost to the aggregate demand. 

What is done by the UK government and central bank? 

Monetary Policy:

• Devaluation of the Pound

• Cut interest rates 

Fiscal Policy:

• Quantitative easing policy.

• Cut in the indirect taxes.
  
  In addition to that government provides help for the small businesses. 
  
  

Why these policies may not work?

• The devaluation may not work because exports are decreasing mainly because there is recession in other countries as well so the overall demand for exports is falling. 
  

• Cut in the interest rates to 0.5% may damage confidence and the UK economy will end up as the Japanese during 1990s. Plus this doesn't affect confidence between banks and doesn't encourage banks to lend. 

• Quantitative easing is too risky and may cause high inflation and fall in the purchasing power of money and that will only worsen the situation. 
• 
  Cut in the indirect tax is likely to work when people HAVE money to spend. 
  
  
  Tough time for the chancellor,isn't it?:D.
  
  

Do nothing!

As the world crisis is becoming worse with every month the World economy is coming into the deepest recession ever.Most of the recessions in the world were self-correcting:

• during the booming periods there was overproduction

• after that  the aggregate demand fell
• 
  producers had to cut the production and lower the prices

• people started to buy more

• therefore firms were encouraged to expand.
  

It seems to be nice and simple, so many people surprisingly believe that the global recession will correct itself without governments' support. For example opinion from Forbes' columnist John Tamny who says "get out of the way for the economy to fix itself". He is talking about American economy and his point is "that rather than relying on Washington to fix what ails us, the tried and true answer to our economic pain is to let markets clear in terms of people, machinery and property. Only then will assets reach their proper values, after which the economy will start growing again". In addition to that it is important to remember that the governments' support of banking institutions may only delay the downturn and possibly worsen it because the assets will still be overvalued,the money will still be easy to borrow,people will continue to spend what eventually will lead us to the point when people just won't have money at all while the productive capacity will be enormous.

What will happen afterwards?

"Owners of the capital will stimulate working and middle classes to buy more and more expensive goods,machines and apartments. That will also encourage people to take more and more expensive credits,until these credits will become unpayable.Unpayable credits will lead to bankruptcy of banks,which will be nationalised by the government and therefore will lead to formation of the communist society." K. Marx 1867.

Or

We will just move towards governments' supervision of the bank system and become similar to China's economy which is the only country which is likely to show 7% economic growth in 2009(from Newsweek 19th/jan/2009).